When the economy experiences a permanent supply side shock that shifts the long-run aggregate supply to the right,the short run aggregate supply curve:
A)will instantly shift right with the long-run aggregate supply to the new long-run equilibrium.
B)will begin by shifting left initially,and then be pulled right by the long-run aggregate supply over time.
C)will gradually shift right until it reaches long-run aggregate supply and the new long-run equilibrium.
D)None of these is true.

Question

Quizplus · Accepted Answer

The short-run aggregate supply curve will gradually shift right until it reaches the long-run aggregate supply and the new long-run equilibrium. This is because in the short run, wages and prices are sticky, meaning they do not adjust right away to changes in the economy. As a result, when there is a permanent supply-side shock, it takes time for firms to adjust their production and for prices and wages to fully respond to the new equilibrium level. Therefore, there will be a gradual adjustment until the economy reaches the new long-run equilibrium.

When the Economy Experiences a Permanent Supply Side Shock That